European Regulators Push for Greater ESG Transparency and Accountability in Finance

While investor interest in ESG has waned somewhat in the US, European Union regulators are doubling down on their ambitious sustainability goals. The EU’s Sustainable Finance Framework now comprises more than 20 individual pieces of legislation spanning sustainable business activities, new corporate governance rules, and product and service standards. Furthermore, finance leaders on the continent, including major players like Allianz and Nordea, have been calling for even tougher rules, primarily regarding sustainability reporting requirements.

An overarching goal of these initiatives is to enforce greater transparency in sustainability reporting to combat the persistent problem of greenwashing—where entities make exaggerated or misleading sustainability claims. The European Commission is leading the development of the Sustainable Finance Disclosure Regulation (SFDR), a regulation that requires participants in financial markets throughout the bloc to disclose information about the sustainability risks and impacts of their investments and operations. The legislation is currently moving to a simplified classification framework categorizing all financial products into four groups: 

• Sustainable. This group includes all financial products that already on sustainable activities or assets, such as those investing in economic activities that align with the EU’s environmental and social objectives.
• Transition. This includes companies and sectors that have not yet been deemed sustainable, but are actively supporting the transition to net-zero. Examples include investments in entities with credible transition plans, such as fossil-heavy industries moving to renewables.
• ESG collection. Products that integrate ESG considerations, but without a strong sustainability or transition focus, fall into this category, which includes things like general equity funds that screens out certain harmful industries but don’t set sustainability as a goal.
• Non-categorized. Any financial product that doesn’t fit into either of the above categories is placed in the unclassified bucket, but even they must provide certain mandatory disclosures like carbon footprints and adherence to human rights standards.

The European Securities and Markets Authority (ESMA) is also cracking down on the use of ESG-related terms in the names of investment funds, the goal being to stop ambiguous marketing and improve clarity for investors. Under these new regulations, any fund with a name that includes terms like ‘ESG’, ‘Green’, or ‘Sustainable’ must allocate a minimum of 80% of its investments towards assets that meet specific requirements, such as being categorized by the SFDR under its new framework as ‘Sustainable’. Together, these measures signal Europe is setting a global benchmark for ESG accountability, especially at a time when the US—the world’s largest economy—faces continued political polarization on the matter.